premfan

I think that is quite unfair. Prem and other value investing greats have earned their honours over the decades because they aren't emotional, but rather, quite rational in the face of Mr. Market's emotions. That is how value investors succeed. [/size] [/size]I don't think it's unfair. I know he's had a solid long-term track record. I just don't think that should make him immune from criticism. It's fine that people gave him leeway for mistakes in a couple year period, but it's going on about 6 years of poor investing results now. If they had just put their cash into an index fund for the last 6 years Fairfax would be quite a stronger and larger company. I dont really have anything new to add to the convo. But, prem and his team are what they are. With fairfax you get 1.) Insurance Float 2.) A team with a above average track record for decades 3.) Graham type investors. They like buying things that are cheap that need some tender loving care. 4.) A candid owner/operator with Prem 5.) Macro focused team I think its important to mentally frame the companies that you own. Companies are what they are. The future is always now. What companies are doing now is the future. So when people so "x" will turn this into a brk type business. Ask yourself are there any hints of this according NOW? If no you are not acting rational and are bound to feel heartbroken due to your unreasonable expectations. Not having respect for someone who built a company from scratch into a multi billion dollar company is silly and shows me that people that think that way have never run a small business in the real world. So: Mentally frame companies into categories. You can have a next brk group, garp, or whatever. Be aware that the future is always now and actions taken now need to reflect your mental frame for the company. The heart break happens so to speak when you think you framed the company properly and something happens to ruin that perception. At that point there is nothing you can do and either you change the frame and accept . Or leave the relationship and find a new guru.

Prem and his team didnt become stupid overnight. You guys are overreacting. Your expectations are too high. This is a setback but i'm sure there is a lesson to be learned here which will make them stronger in the future.

My investor friend that's been in the game for 3 years has a ten year goal of becoming a activist. He has never managed or started a small business. We have officially hit the activist bubble

I read Fisher's book but I forgot most of it. I remember that he recommends visiting the actual businesses, but I'm not sure about that. Some of the best performing stocks have ugly stores. Most dollar stores are tacky. Dollarama (DOL.TO) is one of the tackier dollar stores out there (the logo is the ugliest in my opinion), but it has the highest return on capital of all the dollar stores out there. Many of the restaurants owned by MTY Food Group are tacky. Taco Time looks bad in comparison to Taco Bell. MTY stock has gone up 100X in the last decade (!!). Walmart was supposedly really ugly when it started. Some retailers waste money on IT but it's hard to see. You'd have to read the financial statements. 2- What happens if the CEO leaves: Heh. You're in trouble! I think that has been Buffett's experience. When Rose Blumpkin left Nebraska Furniture Mart to fight her family, she beat her own family. There's another Berkshire retailer where the CEO left and things went bad. When superstars like Questrom and Mickey Drexler leave, the company usually goes downhill afterwards. So most of the time, Buffett prefers stocks with moats over management-driven businesses. Television stations used to have very good moats. But the moat companies are sometimes run by really bad CEOs. So Buffett ended up selling out of Kraft and Fannie/Freddie. If he owns the business 100%, I think he'd prefer a moat because he can replace the CEO if things get really bad. 3- How to spot the really great businesses: I'm not sure about that one. Perhaps just stick to the super obvious moats: Visa (and to a lesser degree Mastercard), Ebay + Paypal, etc. Superstar managers: Buffett, John Malone (though Berkshire is more focused on DTV than LMCA, which I think is a mistake), etc. Retail managers: Christine Day, the Dollarama guy, TJX/Carol M. Meyrowitz, ROST/Michael Balmuth, Drexler, Questrom, etc. I have a list on my blog with less obvious ones: http://glennchan.wordpress.com/2013/10/11/quality-businesses-on-my-radar/ Ross' signature has some moat stocks in there too. Nice blog. I believe you made a really good point about scale. Most high return on capital companies cant scale well. Looking for business's that can scale and keep the high return on capital is the holy grail. Retail is a very easy business to scale and companies that have great ROIC the market usually gives a very generous multiple. Companies like pet meds express which has amazing ROIC but cant scale has to relie on great capital allocation for outsized returns. Just looked at dollarama very impressive ROIC. Are there any other dollar store competitors in Canada?

+1. Rost and TJX have a huge advantage in operating expense per percent of rev. They are the low cost operators in a commodity business.

That's a great point. You are publicly building a track record with no capital down. From a business point you cant lose. You have no operating expense and it your results are above average this will be easy to scale up. Perfect asset light high ROIC business. Also little to no competitors in a niche business. You already research owner/operators so you are doing what you love. This could be a home run and a great win/win I wish you continued success.

Half way through the paper. Excellent paper! Thank you for posting!

Awesome post!

Your right its not superior. Value investing is a philosophy that reasonates with investors that have a certain temperament. The great investors trust there gut. Its the intuition that creates the win. Developing intuition is superior to any style or investing philosophy. Intuition? Boy, if only I could invest with intuition, I wouldn't have to do any hard work or analysis ;D Intuition is the secret sauce, the xfactor, what separates the truly great. Intuition is illogical in nature. I know a lot of real estate investors that have amazing intuition. Hard work and analysis is logical . Mix it with a splash of intuition you win.

Your right its not superior. Value investing is a philosophy that reasonates with investors that have a certain temperament. The great investors trust there gut. Its the intuition that creates the win. Developing intuition is superior to any style or investing philosophy.

Thank you for sharing

Myth, Whats the cost of living and quality of life difference living in Melbourne compared to the states?

Right. Saying actors are a commodity might be too generalized. Although actors are not born they are made. I know some talented actors that just need a "break". The difference between a good to great actor is huge. They are plenty of good actors with a bit more coaching and practice might become great. The great actors have their subcommunications absolutely down. They are masters of facial expressions, voice tonality, body language, and timing. Few actors have this mastered. A lot of high profile hedge fund people are basically actors. Perfect everything that FITS the model of a hedge fund wall street type think Daniel loeb and ackman. How many other actors could have played Daniel Craig's role well? Heres the profile: good looking, muscular, charisma, and british accent. That leaves the pool to say to keep it simple 1,000 actors. 1000 thousand supply to 1 demand ( movie). Actors just model stereotypes Its a learnable skill just like anything else. You are absolutely right with the incentives not being aligned.

Just have to listen to Munger's lessons on cognitive biases. In this case, incentive bias. Clooney doesn't star in the "safe" movies (ex: the mediocre action movies guaranteed to draw an audience) easy money makers. Loeb wants Sony to make more of those movies and take less risk, which would reduce opportunities for Clooney. Not very surprising that Clooney is against it, even though he is typically a lot smarter than that. The same applies to Loeb. He doesn't care about any artistic or cultural values, he just wants the most profitable ventures put forth. What's wrong with that? Isn't the purpose of a business to put forth its most profitable ventures? Exactly. Something needs to disrupt the cost structure of producing a movie. Actors are not an asset but a just a commodity. I lived in Hollywood for nine months and everyone has a struggling actor EVERYONE. Too much supply not enough demand.

Clooney is just trying to protect his earning power. Studios produce movies. The movie theaters are the marketplace. The buyers are people like us. Movies are for the most part a commodity ( not including comic franchises). Studios need to become the lowest cost producer of a movie ( commodity). This means squeezing out actors.

As a result I disagree with the notion that value is an intrinsic property or that it can be estimated/revealed. What i take from this statement is nothing has value. No business or anything can control its execution. The first part is a value system issue. Everything has SOME value. The second part is correct. No one or business can fully control its execution. Having a go with the flow mindset and living in a relative world not absolute world mindset will help when things go a bit south.

The best reply i could give is value gets revealed by execution. Anything you value you have to take action ( execution) for it to potentially manifest itself. People want to get rich but they choose to watch tv and play video games. Or even worse work for an employer trading in time for money. Every human being has the same IV. Its the execution and value system that separates the jordan belfort from a warren buffet. The marketplace is the ultimate judge of whats valuable. Fill a marketplace need and boom your valuable. People and markets will always evaluate you or anything. Its the name of the game. Accept it, Embrace it , and use it as leverage. Intrinsic ability is useless its called potential. Back that up with great execution and your a master. Earning potential ( economics of asset) + execution = IV . Take one away and it doesnt flow. IV is subjective and there is no one right number. Use the framework of is the company increasing or decreasing its earning potential. Make it polarizating so its not so subjective of a number.

Palantir, I would say use that same logic in business. Any action that management executes would have to be gauged subjectively as an action that increases future earning potential or decreases. I use subjective cause it is subjective unless you are coke and the other stalwarts. Management execution is the most important factor if your asset is earning more or less in the future. Replace management with "you". You want to increase your spanish language potential (SL) would it increase going to spanish class or increase going to the bar? Stuff like that. You want to increase your salsa dance potential would it increase getting private lessons or group lessons?

But again, how do you know that time will reveal the outcome of IV and how do you know when you are at IV? Also...how do you know IV even exists? Serious question btw. The way I see it, IV is just an arbitrary construct of "this is what I think others would pay for it if they saw what I see". Value investors doing existentialism. I like your contrarian nature towards IV. Heres a question say i earn 60k a year. I save up money and get accepted to a elite business school. Does my IV increase after graduation?

IV to me is earning potential. Company did "x" last year did it increase IV? You never know if any company action increases IV until it manifests itself years down. I only use IV for stable predictable business's with a moat and pricing power. The increase in earning power is a price increase. The price increase increases IV ( if the business has operating leverage). Say i want to buy a commerical property. I put down 50 percent in cash. Has my IV of my company increased or decreased? Many variables like i'm i adding value by opening up a business or renting it out to a tenant. Whats the greater ROIC? I would go with opening up a business. The income increase wouldnt manifest itself until there is momentum in the business which could take a year or longer. So as an investor in my company would you say my IV increased with the purchase of the commerical property? The answer i think is no one knows but if there is a track record of success and the business is in a system of similar business's that the company developed with a high ROIC. You would say yes the commerical property at the time of purchase increased IV due to future earning potential down the line. IV is much easier to predict in business's with a track record of success. So its definitely a useful tool. Each company action will have to be gauged if it increases or decreases future earning potential. Earning potential is the key metric. Determing potential is subjective though. Everything has potential. The execution of that potential is the determining factor. If a company has a poor history of execution why would i think its going to be different in the future.

It doesnt feel like a housing bubble to me. There isnt a mass consumer adoption where everyone has to own a home. Like its there personal right to own one. In my area i have seen insane price increases from 2009- until now in luxury condos. The nicest condos here have increased around 15-20 percent compound per year. Maybe its the wealth effect. The rich have gotten a lot richer the last 3 years or so. Multi-family rental units are also on fire around here. So if there would be any bubble it would be in investment property that the rich are buying. The rich have a huge advance in locking lower than average rates for a longer term. So it would make sense to buy luxury property while locking down insanely low rates.

I think you hit the nail on the head. Fear is a healthy thing and should be embraced. I'm a bit skeptical of investors who have high conviction in a idea and state they have no self-doubt or fear. Its inhuman and emotionless. If you are a mere moral like 99 percent of us. Use fear as leverage in pulling the trigger only if your work says so and its a reality vs perception event based on numbers that make your reality. The 1 percent can be emotionless and inhuman. Thank you for sharing. Awesome post.

Comfort level for me means going with a trend or crowd. Being on the same side as the majority of people. Not feeling nervous or uncomfortable pulling the trigger to buy some more. Feeling kinda cocky and thinking everyone else MUST be wrong. My best returns have been when i have the "what i'm i missing" frame of mind. Why are people so negative when the numbers are positive? Why is the market thinking bankrupty when their is no long term debt? Things that dont add up. A perception vs reality event where the market's perception is "x" and the reality according to me is "y" where a few key metrics make up that reality. Even after gaining conviction in the reality of the situation i still feel uncomfortable going against the crowd. Knowing that i'm uncomfortable is a good way for me to gauge if i should make the bet. Recently, energold drilling has been my worse performer. Although, it has turned into more of a event driven company now. My best has been groupon i opened up a position late last year. I made a thread outlining my thinking and even though i had conviction i was still uncomfortable making the purchase. Good stuff. Its good to be reminded that the only way to make excess returns is to buy when the consensus is overly negative. A perception vs reality event. This kind of reminds me of the horse handicapping study. I'm referring to the one where handicappers were given a few pieces of data and then asked for their results, then given more pieces of data, etc. Each time they got more data they felt more comfortable, yet their results didn't improve and in fact if memory serves were worse. We all invest differently. You have to do what makes you feel comfortable. I would say for me one of the skills I have that has assisted me the most with investing is the ability to make decisions based on imperfect information and the ability to pull the trigger quickly. That was all honed though from doing it in other contexts. To me, when I read your post I think that the investments that might make one the most comfortable are going to be very well known and "safe" in the sense that it's something like KO. To be honest I've never spent any time on an investment like that, but I can imagine reading and reading and reading and feeling very good about Coke's place in the world. However, other than a few times in the past few decades there hasn't been a time to buy KO, in my opinion, where returns will be anything to write home about. Compare that to some little company that might have had major issues in the recent past and some less savory characters running the shop. It doesn't provide that same comfort level but potentially provides outsized returns. At the end of the day, you have to do what you think is right. Know thyself. If you try to be someone who you aren't, that can lead to bad results. thanks for reply. I was curious to see if great investors on the board like yourself gauged comfort level ( or how ever else you want to describe it) when pulling the trigger. Maybe the great investors are a different animal where once conviction is bulit there is zero fear. For me i have noticed to accept and embrace the uncomfortable feeling and most importantly to be aware that it might be a good sign to pull the trigger even more.

Recently i have been reviewing back on my best and worse investments. I have noticed the more comfortable i have been buying a company the worse returns i have achieved. The more uncomfortable i have felt when making a investment the greater the returns ( i have a mini checklist where comfort level is measured subjectively ). All my investments are high conviction if they werent i would hold cash instead. Comfort level or fear is the most important metric i have noticed. Being honest when you are fearful ( you guys are human right?) is a great skill to have. More importantly after doing the work. Gaining the conviction in your idea and still being somewhat uncomfortable making the bet is a good sign you should be making the bet. I'm wondering if other board members have noticed their best returns where achieved when they were uncomfortable making the bet? ( Eric you dont have to answer we all know you are an investing savant)

I'm enjoying this thread especially the insights of packer and gio. I believe in packer's comment where even if there is a shock in the system but rates are still historically low. Stocks should rise or still do fine. I like to keep things simple especially where i have no control in the outcome. Low interests= high asset prices. Right? Gio has alot of conviction and assumptions with fairfax. This is great and most people on the board are with you for the love and admiration of prem and his team. But, saying in 10 years the return will be probadly "x" is an assumption where there is no way you can honestly predict. You cant predict something that inherently is unpredictable in nature. No one can predict future CR. Best assumption is using their track record of combined ratio. Also you cant predict their investment return because its basically out of their control. There is no point having an absolute mindset when we live in a relative world. In my business i dont have to compete with a guy in nyc. I have to worry about being the best business in my chosen niche in my relative mile radius. This is not coca cola where you can predict to some degree units of coca sold X unit of profit per soda. This is not colgate or any established consumer brand. This is a company thats in insurance ( unpredictable) and in the financial markets ( unpredictable). What is predictable is prem will treat shareholders in a fair and friendly nature.